By September 2014, the OECD intends to issue a report (another one) identifying issues raised by the digital economy and possible approaches to them.

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Taxation is at the core of countries’ sovereignty, but in recent years,
multinational companies have avoided taxation in their home countries by pushing
activities abroad to low- or no-tax jurisdictions. This is referred to as BEPS
(Base Erosion and Profit Shifting). The G20 asked the Organization for Economic
Cooperation and Development to confront this growing issue by creating an action
plan to address BEPS, and on July 19, they identified a series of steps and set
timelines for their implementation. Following are highlights from the OECD’s
timetable:

By September 2014, the OECD intends to issue a report (another one)
identifying issues raised by the digital economy and possible approaches to
them. In fact, this is the number one issue identified in the action
plan.

According to the OECD, a company is able to have a significant
digital presence in the economy of another country without being liable to
taxation under current international rules. Also there are issues with
attributing value created from the generation of marketable location-relevant
data (who does this remind you of?).

You can expect tighter “transfer
pricing” proposals for transactions between related companies in a multinational
group. Furthermore, the OECD wants to check how to ensure the effective
collection of valueadded taxes with respect to the cross-border supply of
digital goods and services.

In addition, the OECD intends to develop
rules to deal with hybrid instruments (debt in one country, equity in another)
and hybrid entities (taxable in one country, ignored in another, e.g. US
LLC).

Hybrids are not always good for the tax environment. The result
currently is sometimes double non taxation – no tax on receipts in one country,
deductible expense in the paying country. The OECD is likely to propose changes
to tax treaties and domestic tax laws.

The idea is that
individual countries can more quickly agree anti-avoidance tax measures with a
number of countries in one go, instead of signing tax treaties with other
individual countries that can take years.

By September 2015, the OECD intends to develop
recommendations regarding controlled foreign companies – usually offshore
companies. Many Western countries (including Israel) have them but they do vary
a bit.

Also, the OECD wants to limit interest “excessive” expense
deductions for interest on loans and other products from related and third
parties.

The OECD will develop rules against so called “commissionaire”
arrangements.

These are cross border trading arrangements where a local
agent “sells” goods of a foreign supplier that the local agent doesn’t really
own. The OECD intends to clarify that the foreign supplier is really doing
business via a “permanent establishment” in the local country and ought to pay
taxes there.

Also, the OECD plans to develop rules to ensure that
“inappropriate returns” will no longer accrue to an entity solely because it has
assumed risks or provided capital.

Methodologies will be established for
collecting and analyzing data on BEPS and requiring taxpayers to disclose their
“aggressive” tax planning arrangements.

Some Western countries including
Israel have rules requiring taxpayers to report certain tax shelters they have.
Tax treaty dispute procedures will be made more effective although there is a
rider slipped in that arbitration may be denied in certain cases. (Comment: If
justice is to be denied, this does not augur well for the action plan as a
whole...) Some items to be reported on by September 2014 will be further
developed by September or December 2015. These include rules regarding interest
deductions, transparency and a multilateral treaty.

Comments

There is a
perception that multinational corporations have successfully exploited
weaknesses in current tax laws and treaties to reduce tax revenues of many
governments by large amounts. If the action plan is indeed finished by the end
of 2015, individual countries will need to then legislate and implement the OECD
action plan.

So tax revenues from multinationals may not increase
dramatically for at least a few more years. Of course, it remains to be seen if
the action plan will work or whether we’ll merely see cat-and-mouse tactics
involving new tax planning techniques to avoid the planned new tax
measures.

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